City Histories Why the UK has non-doms and the US has none
Only fragments of the British Empire remain, and the American civil war ended 150 years ago – yet in dusty corners of the countries’ tax systems surprisingly durable legacies survive.
The UK’s non-dom tax loophole is a relic of the Empire, yet ironically it is availed of by London’s cosmopolitan high net worth jet set with enthusiasm, with famous non-doms including Indian steel magnate Lakshmi Mittal and Russian oligarch Roman Abramovich.
The tax quirk has survived for over two centuries and withstood greater budget pressures than the current economic climate. But the non-dom system now faces its biggest threat, with Labour pledging to scrap the system that Ed Miliband described last week as making Britain “an offshore tax haven for a few”.
Supporting a global elite is probably not what William Pitt the Younger’s government had in mind when it introduced the loophole at the end of the 18th century.
Britain was in desperate need of cash to fight Napoleon and Pitt (pictured) had to walk a tightrope between raising extra revenue and encouraging trade.
Pitt opted for the highly controversial introduction of income tax in 1799, but was particularly worried that the new taxation schemes would hamper the trading system, which was becoming the lifeblood and revenue generator of the Empire. If residents in Britain found that they were being taxed on income from overseas assets, it would discourage them from making exactly the sort of investment in colonial ventures the government wanted. So a loophole was devised – and survives in the polite fiction that people who clearly live and work in Britain are not domiciled there when it comes to taxing income and assets they have elsewhere.
As Britain and its Empire flourished, the lubrication of trading routes was a key budgetary and economic consideration, meaning that the non-dom system remained essentially untouched.
Since the days of Pitt the Younger, Britain has lost an Empire but gained a globalised elite, many of whom hail from the former colonies and now use the tax system that propped up colonialism to their advantage.
As the importance of the colonies faded, the non-dom quirk moved from being a way to encourage outward investment in the colonies into a way to attract foreign wealth.
In contrast, American readers will be well aware that the US taxes its citizens’ worldwide income, regardless of where they live or where it is earned.
Like the British, the US income tax peculiarities have their genesis in conflict, but the logic behind them was the reverse of Britain’s non-dom system.
The Americans wanted to keep people and capital within their borders rather than pursue Britain’s expansionist ideals.
The US was slower than Britain to introduce income tax but, in the end, did so for the same reason – war finance. In 1861 the Federal government imposed the tax to support its effort in the Civil War.
The US imposed a 3% tax on incomes over $800 but penalised US citizens living abroad, taxing their incomes at 5%. The idea was to stop the well-off escaping to safe havens rather than doing their duty in battle.
In Britain, while the economic justification of abolishing the non-dom system is debatable, the political expediency is not. A defining aspect of Pitt’s government may be close to being consigned to the history books.
US governments are less likely to dispense with such a lucrative income stream.
